Date: 19980812
Docket: 96-462-GST-I
BETWEEN:
WINNIPEG LIVESTOCK SALES LTD.,
Appellant,
and
HER MAJESTY THE QUEEN,
Respondent.
Reasons for Judgment
Sarchuk, J.T.C.C.
[1] Winnipeg Livestock Sales Ltd. appeals from an assessment
of goods and services tax (GST) for the period January 1, 1991 to
August 31, 1993. At all relevant times, the Appellant has been a
registrant for purposes of the Excise Tax Act (the
Act) under registration no. 121353619.
[2] In assessing the Appellant, the Minister assumed that (i)
the Appellant provided boarding facilities in the form of pens,
water and feed for livestock producers and buyers who required
that their cattle be fed and stored prior to sale or shipment
(cattle storage); (ii) the Appellant provided boarding facilities
in the form of pens, water and feed to carriers for livestock in
transit to be rested, watered and fed during stop-overs
(through-loads); (iii) the Appellant collected no GST on its
supplies of hay and straw sales, cattle storage and through-load
services during the relevant period.[1]
[3] The Appellant also arranged for insurance coverage from
the Hartford Fire Insurance Company for any livestock in the
Appellant’s care, custody or control. Each farmer or
purchaser was billed separately for the cost of insurance plus
the Appellant’s mark-up under the category of insurance
coverage on the Appellant’s form of invoice. The Appellant
did not charge GST on the supply of this coverage. At the
commencement of the hearing, Counsel for the Appellant advised
the Court that the question whether financial services, being
insurance policies, were being provided in respect of which the
Appellant failed to collect and remit GST, was being
abandoned.
Evidence
[4] The Appellant is a livestock marketing agency. Its primary
business is to receive producers’ livestock for sale by
auction. The Appellant also provides a storage and assembly
facility for buyers who need that service and a food, water and
rest facility for animals in transit to motor carriers as
required of the latter by sections 148 and 149 of the Health
of Animals Regulations (Regulations).[2] During peak periods, the
Appellant handles 4500 to 5000 cattle with the largest volumes
occurring on Fridays when 2500-3000 head may go through its
facilities.
[5] The Appellant’s place of business consists of an
office area, an auction ring and three separate pen areas
(alleys). The latter, which are relevant to the issues before the
Court can be described as follows:
(a) Before sales alleys: these are pens where cattle received
from producers are housed prior to sale. These alleys do not have
any water or feeding facilities since as a general rule the
animals are kept at most overnight and are housed elsewhere
following sale. The producers pay the Appellant a sales
commission but no storage or other charges are levied.
Following sale, the cattle are moved to either the regular or
500 alleys. Where they go depends on the size of purchase.
Generally, small purchases, i.e. less than 30-40 head, are housed
in the regular alleys, whereas purchases of “semi”
load size or greater, are housed in the 500 alleys.[3] [4] The latter are generally made by
order buyers hired by packing plants and feed lots and can amount
to 800-1000 head per week. In addition to the cattle
purchased at the Appellant’s, order buyers may have
purchased cattle elsewhere and brought them to the
Appellant’s for assembly prior to shipment.
(b) Regular alleys: these alleys are equipped with automatic
water bowls and feed racks for square hay bales (average weight
60-70 pounds). Cattle placed in these alleys are not fed unless
the purchaser so directs. In that case, he must fill out a
requisition specifying which cattle are to receive hay and the
number of bales required. The Appellant charges the customer
$4.00 per bale for the hay. If straw is required, it also must be
ordered and a further charge is made.
(c) The 500 alleys are larger and more recently constructed
pens. They are also equipped with automatic water bowls and feed
racks, the latter holding round hay bales weighing 1500-1700
pounds. All cattle purchased at auction and placed in the 500
alleys are automatically fed and the buyer is billed $1.50 per
head. There is no storage charge levied with respect to
these cattle. However, with respect to the cattle purchased
elsewhere and brought to the Appellant’s for assembly, the
buyers are charged storage fees of $2.50 per head in addition to
the $1.50 per head charged for feed.
[6] Consumption of feed always occurs on premises. There are
no identifiable bales of hay in the 500 alleys which are
specifically assigned to a producer/purchaser. No hay is sold by
the Appellant other than in the context of storage and
feeding.
[7] The through-load service provided to transporters of
cattle includes the provision of feed, water and rest areas for
the animals. This service is provided in the 500 alleys at a flat
rate per load of $140. According to Pleuman, this rate was
determined on the basis of $120 for feed and $20 for labour, i.e.
loading and unloading. He maintains that there is no storage
charge component in this flat rate.
[8] Two issues remain to be determined:
(a) whether the Minister correctly assessed tax for the
Appellant’s provision of boarding facilities in the form of
pens, water and feed to carriers for livestock in-transit to be
rested, watered and fed during stop-overs
(through-loads).
(b) whether the Minister correctly assessed tax for the
provision of boarding facilities in the form of pens, water and
feed for livestock buyers who required that their cattle be fed
and stored prior to sale or shipment. The parties have advised
the Court that this issue now relates only to cattle held in the
500 alleys.[5]
[9] The Appellant’s overall position with respect to
both issues is that irrespective of the supply of any other
services its main provision to those who use its facility is the
supply of hay. The Appellant further contends that in its
operation, feed, specifically hay, is supplied in such quantities
that under the Excise Tax Act it can only be regarded as a
zero-rated supply.
Through-Loads
[10] The Appellant contends that the $140 through-load charge
is based on an estimate of the amount of feed which would be
consumed by an average “semi” load of cattle, the
value of which was $120. The Appellant argues that the balance of
$20 representing labour costs forms but a small portion of the
overall cost and would not exist separate and apart from the
provision of feed to the cattle. Since the greatest portion of
the charge is for the hay consumed, the fact that other elements
of “service” (water, a place to rest, etc.) are
provided should not change what is in essence being provided,
that being the sale of hay for feed.
[11] Counsel for the Appellant further argues that in
considering the substance and form of the activity, it is
necessary to look at the quantum or scale of what is being
provided in the context of the entire transaction.[6] In this case, an
analysis of the true commercial and practical nature of the
Appellant’s transactions can only lead to a conclusion that
to the extent there is a provision by the Appellant of
“services”, they are ancillary to the sale of
hay.
Conclusion
[12] In assessing the nature of the through-load service, it
is essential to determine whether we are dealing with the supply
of goods, in this case, feed, or whether we are dealing with the
supply of a service in which goods are consumed. I agree with
Counsel for the Appellant that to properly interpret the
Act and the Regulations, the factual situation must
be approached with a view to understanding the substance and
reality of the underlying transactions. However, I disagree with
him as to the conclusion to be reached thereby on the facts
before this Court.
[13] The appropriate test to determine whether there were
separate taxable supplies or a single supply is whether the
alleged separate supply was an integral part or component of the
overall supply. As Rip J. observed in O.A. Brown:[7]
One factor to be considered is whether or not the alleged
separate supply can be realistically omitted from the overall
supply. This is not conclusive but is a factor that assists in
determining the substance of the transaction. ...
The fact that a separate charge is made for one constituent
part of a compound supply does not alter the tax consequences of
that element. Whether the tax is charged or not charged is
governed by the nature of the supply. In each case it is useful
to consider whether it would be possible to purchase each of the
various elements separately and still end up with a useful
article or service. For if it is not possible then it is a
necessary conclusion that the supply is a compound supply which
cannot be split up for tax purposes.
Emphasis added
[14] The service specifically sought by the Appellant’s
customers is that mandated by the provisions of the
Regulations, the relevant portions of which read:
Food and Water for Animals in Transit
148(1) Subject to subsections (2), (3) and (7), no person
shall confine in a railway car, motor vehicle, aircraft or
vessel
...
(b) cattle, sheep, goats or other ruminants for longer
than 48 hours.
148(4) Livestock that is unloaded from a railway car,
motor vehicle, aircraft or vessel to be fed, watered and
rested before the livestock is re-loaded, shall be unloaded
into a pen, rested for not less than five hours, provided with an
ample quantity of suitable food and potable ice-free water,
and before the livestock is re-loaded, the floor of the
railway car, motor vehicle, aircraft or vessel shall be littered
with straw, wood shavings or other bedding material.
148(5) A pen in which livestock is unloaded pursuant to
subsection (4) shall provide
(a) sufficient space for all the livestock to lie
down at the same time;
(b) properly designed racks and troughs for feeding
and watering the livestock;
(c) well-drained and clean floors of concrete or
gravel that provide safe footing;
(d) an adequate amount of straw or other litter to
bed the livestock; and
(e) protection from inclement weather.
Emphasis added
[15] I am unable to accept the submission that whatever other
services may be provided by the Appellant are merely part and
parcel of the supply of hay. The users of the through-load
service are concerned not just with feeding their cargo but with
storing, securing and ensuring the safety of their animals while
obtaining access to water and feed, coupled with an adequate
place to rest. Furthermore, a through-load customer does not have
the option of acquiring any of the particular elements of the
service provided by the Appellant separately, rather the
provision of a particular element is entirely contingent on the
provision of all the other required elements. As was observed by
Rip J. in O.A. Brown:[8]
... Only if taken together do they form a useful service ...
The alleged separate supplies cannot be realistically omitted
from the overall supply and in fact are the essence of the
overall supply. ...
Each of the required elements is an integral part or component
of a composite whole and thus, constitute a single supply. That
single supply is not the supply of hay since in the context of
this particular transaction, feed, as a single stand-alone
element, cannot be of any use to the customer. The fact that
there may be a substantial disparity in the value or cost of the
separate elements does not alter that fact.
[16] A realistic examination of the through-load service
establishes that the Appellant does not merely provide property,
i.e. hay, straw, water, etc. to its through-load customers, but
rather enters into a contract to perform the specialized services
required of it by them. These specialized services constitute a
composite whole and were, for the purposes of this Act,
correctly considered by the Minister to be a single supply. With
respect to this issue, the appeal is dismissed.
Supply of hay - 500 alleys
[17] The issue to be determined is whether the provision of
hay to animals following their sale at auction, as well as to
animals purchased elsewhere and brought to the Appellant’s
for assembly, is a separate supply for the purposes of the
Act.
[18] It is the Respondent’s position that the provisions
of the Act and, in particular, of Schedule VI with respect
to zero-rated supply, contemplate a situation where there is a
direct sale of feed and not a sale of service, a part of which
might reflect the provision of feed. Since the subsequent
services provided by the Appellant to purchasers of cattle at its
auction include hay, water, straw, as well as storage and
assembly, it is readily apparent that this constitutes a sale of
services (a form of boarding) and cannot be considered the
purchase of feed as a single supply of goods. Thus, while
pursuant to the Act the provision of hay may be a
zero-rated supply, that is not synonymous with the activity of
providing that feed.
[19] The Respondent contends that the issue is the supply of
service, that it is a taxable service, and that the provision of
feed is but part of that service. It was not a separate and
distinct supply and, therefore, as the service itself is taxable,
so is the feed and straw.
[20] Although the Appellant acknowledges that there are other
considerations involved in the use of its facilities, it contends
that its main provision to the purchasers who use its facilities
and in particular, the 500 alleys, is that of hay which based on
the quantity sold, should be a zero-rated supply. Counsel further
argues that the Minister has accepted the Appellant’s
position with respect to the supply of hay to cattle held in the
regular alleys, and distinguishing that transaction from the
supply of hay to cattle held in the 500 alleys is
inconsistent and ignores the commercial and practical nature of
the transactions in issue.
[21] I have concluded, not without some concern, that the
position advanced by the Appellant is correct. It is appropriate
at this point to revisit the manner in which cattle are dealt
with following sale. As a general rule, small orders (no larger
than approximately 30 head) are transferred to the regular alleys
to be held until the purchaser ships them out. In these alleys,
hay is provided in small bales, at a set price, but only upon
request of the purchaser. Water is provided automatically. The
same protocol applies with respect to the provision of straw.
Although large purchase orders in the normal course are allocated
to the 500 pens, there are a number of options available to
the purchaser. First, he may accept storage of those cattle in
the 500 pens and pay $1.50 per day per head for feed. On the
other hand, if cattle can be shipped expeditiously, the purchaser
may opt to have them placed in the regular alleys and not be fed.
In other circumstances, an order buyer may wish to segregate
calves from the rest of his assembly and request that they be
placed in the regular alleys and be fed at a cost of $4.00 per
bale. As contrasted to the through-load services provided by the
Appellant, the purchaser of cattle does have an option as to what
supplies are necessary for his particular purposes.
[22] The Respondent argues that although the Appellant
maintains that the $1.50 per head charge is ostensibly for feed,
it is realistic to conclude that part of that charge is for the
use of the actual facility itself. The evidence suggests
otherwise. The Appellant is not in the business of purchasing and
reselling livestock. Rather, it provides an auction facility for
producers and purchasers and, as Pleuman testified, its main
revenue source is the sales commissions arising therefrom. To do
so, it requires a large facility to store the cattle from the
time of delivery for the auction sale to the time they are
shipped out. As a matter of practice, the Appellant does not
charge storage fees to the producers or purchasers with respect
to cattle sold through the auction on its premises, and this is
the case whether the cattle are placed in the 500 or the regular
alleys.[9] I accept
Pleuman’s testimony that the per day per head charge for
feed is based solely on the Appellant’s cost plus a mark-up
and does not include or incorporate any charge for storage. On
balance, it is clear that as consideration for the $1.50 per day
per head payment, the purchaser received feed and no other
consideration.
[23] Pleuman’s testimony is to some extent confirmed by
the fact that if storage was required for cattle not purchased at
the Appellant’s facility, such storage was supplied as
consideration for the payment of $2.50 per day per head. On the
evidence, it would appear that each supply, i.e. the supply of
storage and of feed are separate and do not form part of any
overall supply. I add that it would appear that the Minister has
recognized this by his reassessment with respect to the provision
of hay in the regular alleys.
[24] The Respondent also argued that in the 500 alleys, the
purchaser does not acquire a fixed amount of feed as is the case
in the regular alleys, but merely entitles his cattle to share in
a communal bale of hay. This submission ignores the fact that
there is virtually no difference as between the regular alleys
and the 500 alleys with respect to the amount of feed supplied
per animal and the cost of that feed to a purchaser. The evidence
was that on average, a 1000 lb. animal consumes one-third to
one-half of a square bale of hay per day. It is logical to infer
that this is the basis upon which a purchaser would calculate his
feed requirement for cattle held in the regular alleys. According
to Pleuman, the actual cost for feed per animal per day in the
regular alley ranges from $1.35 to $2.00 which amount is
virtually the same as the cost of feed consumed by an animal
placed in the 500 alley from the round bales, at a price of
$1.50.[10]
[25] Under section 1(2) of the Regulations feed must be
sold at bulk quantities of at least 20 kilograms, or 40 lbs., or
in bags that contain at least 20 kilograms of feed. The Appellant
contends that in the 500 alleys the quantity of feed,
specifically that of hay, is supplied in such quantities that
under the Act it can properly be regarded as a zero-rated
supply. That position was not challenged.
[26] The Respondent also submitted that section 178 of the
Act is applicable. This section reads:
178 For the purposes of this Part, where in making a supply of
a service a person incurs an expense for which the person is
reimbursed by the recipient of the supply, the reimbursement
shall be deemed to be part of the consideration for the supply of
the service, except to the extent that the expense was incurred
by the person as an agent of the recipient.
This section appears to deal with reimbursement of expenses
without any real element of profit. While there was limited
evidence as to the cost of the supply of hay to the Appellant,
Pleuman did testify that all hay that was sold to its customers
was the subject of a mark-up and that the Appellant did earn a
profit on such sales. Such hay, therefore, is not sold at cost
and section 178 would appear to have no application.
[27] I conclude that the provision of hay to cattle held in
the 500 alleys is a separate supply for the purposes of the
Act. In result, the appeal with resepct to this issue is
allowed.
Signed at Ottawa, Canada, this 12th day of August, 1998.
"A.A. Sarchuk"
J.T.C.C.